Wednesday, 24 August 2011

Real Estate in Crisis - The Block Auction Results 2011

Channel Nine's flagship property spruiking show 'The Block' ended in spectacular fashion this week. For those of you living on another planet, The Block is a 'reality' television show run every few years by Channel 9. Four contestants pit their wits, interior design skills, and bickering prowess against each other for several weeks, transforming unwanted half-derelict dogboxes into 'desirable' homes, then selling them for a tidy profit. Or at least, that's the idea. Let's find out what really happened this year.

It all began in June, when Watercress Productions, the production company behind the series, paid $3.6 million plus $198,000 stamp duty for the four terraces. That's $950,000 each. At the time of purchase, JPP Buyers Advocates' Catherine Cashmore said Watercress would be "very, very lucky to break even" on the deal. How right she was, as we'll find out.

Before the four contestants could even begin their renovations, the four houses had to be re-stumped, re-wired, re-plumbed, and re-roofed, at an estimated cost of $300,000 each. This brings the total cost per house up to $1,250,000 before the show even started.

Then each contestant couple was given a further $100,000 to spend on renovations and there followed eight weeks of drilling, sanding, painting, sawing and banging, with up to 60 tradesmen on site at any time, plus the eight contestants. Even if we ignore their cost in time and labour for those eight weeks, and just add the $100,000 in renovation money given to the contestants, we now have four houses costing $1,350,000 each.

Great, says Channel Nine, we're done. Let's sell these babies! Now, remember the aim is to make a profit. What sort of profit would you expect when selling a house that cost you $1.35 million plus the labour of scores of handymen (plus two months spent renovating, away from your own friends and family)? Does $100,000 profit sound reasonable?

What would you say if I told you the house sold for almost half a million dollars LESS than you paid for it?

That's right folks, despite the best real estate advertising campaign in Australian history, only one home managed to sell on auction night, for $855,000 (a $495,000 loss). Imagine the collective gasp as three million Australian viewers watched the property bubble collapsing before their eyes. Can you picture them clearly, sitting at home, shifting uncomfortably in their seats as they regard the horror on the contestants faces, and the beady little eyes of the auctioneer darting nervously around the uninterested crowd -- 'but I thought house prices always went up dear?'.

Oh no they don't! After the auction, the next house sold for $860,000 (a $490,000 loss), giving us an auction clearance rate of 25% or 50% if we're generous and count the property sold after auction.

The following day the Australian press was saturated with articles about the dismal housing market, the bursting of the bubble, the collapse in sentiment, the fact that property doesn't always go up. Of course, the real estate industry came out fighting with excuses as to why these results weren't representative, in a vain attempt to convince the public that the market was actually quite healthy. Too late, the damage was done. Three million viewers, and probably many millions more the following day, now knew the truth about the Australian property market.

Naturally Channel Nine would have profited through advertising and sponsorship during The Block series, but the dismal auction results and sale price reveal a property market in crisis. Unknowingly Channel Nine may have pulled the trigger on the bursting of the bubbliest city in the bubbliest housing market in the world. Melbourne's property market was in a poor state prior to the disastrous Block finale, with low auction clearance rates, falling prices, and a large overhang of stock (plus much more in the construction pipeline), but there's little doubt the negative publicity provided by The Block will have cemented a truly alarming picture in the minds of most Melbourne homeowners and property investors.

The mainstream media's reporting on the housing market in days after The Block finale was anything but positive.

But then the plot thickened, because amazingly a few days later the other two properties sold. Hooray! The market is saved, demand is high, faith is restored. It's sunshine and lollipops proclaimed the spruiking propaganda machine.

But wait. Number 37 Cameron Street had originally been passed in at auction well under its reserve at $901,000, and number 43 Cameron Street was passed in well under its reserve at $832,000. Oddly enough, when these properties sold several days later, they sold well above reserve, for $1,000,000 and $922,000 respectively. Far be it from me to suggest there is any dishonesty in the real estate industry, but who in their right mind would pay $70,000-$100,000 above reserve for a property that failed to sell at auction several days earlier. I wonder who bought these two properties?

A more suspicious man than myself might suggest the real estate industry and/or Channel Nine were feeling rather nervous following the lackluster auction results and lack of interest in their heavily advertised money pits. A more suspicious man might suggest they had something to gain by ensuring those properties were quickly snapped up at more respectable prices in the following days. But I'm not a suspicious man, so I won't go there. I'm sure they were simply purchased by fools, rather than by vested industry backed buyers.

The image below depicts the situation on Monday, after the first two properties were sold.

So who were the winners out of this whole fiasco? Easy. George and Vicki Stoupas, the elderly couple who originally sold the four derelict dogboxes to Watercress Productions for a cool $3.6 million.

Two couple of my favourite sayings come to mind. 'A fool and his money are soon parted' and 'Theres a sucker born every minute'.

If Channel Nine and Watercress have done one thing, they've shown us who the greatest fools and suckers are.

354 comments:

I don't think the show deserves our attentions for their costings. After all, few people would buy 4 adjacent properties in one go. Neither is the auction fair because the enormous publicity. The one thing that everyone should pick up on is the market sentiment. It's the same across the country right now, especially in the price range these properties were targeting. The era of bidding wars has all but officially pronounced dead on national television, the bargaining power is now truly with the buyers. For those who walked away from these properties, they'll have so many other choices, they'll be wondering why they even bothered with The Block in the first place six months down the road. The show may have started off as a reality show is now more of a "reality check" show. Another series will almost definitely shift more balance of power to the buyers' side. As a potential buyer with absolutely no urgency, I'll look forward to it.

I also think there's something suspicious about the last two sales for way over the reserve price. Of course I have no proof, but I wouldn't be surprised to learn that Channel 9 so someone else may have kicked in some money to get the prices up to where they wanted them to be.

Why would he bother 'discussing' this situation with what is essentially the most bias property forum in the country?

Perhaps for the same reason Sommersofters avoid forums like Steve Keen's Debtwatch for fear of facts and figures being presented to tarnish their obscenely bias views that stem from hard data, rather than industry spruiked propaganda?

This is as much a 'war' between speculators and savers as it is between the haves and have nots.

The great Australian property ponzi will be shown in the records of history for the blatant sting on the population it always was in due course, except when the undeniable facts are on the table, those who sought to profit from the rampant speculative bubble of a generation will be nowhere to be seen or heard.

Whilst the collective debtor clique will continue to push the propaganda as they're trained to do, there will be a small minority who see the system for what it is and continue to speak out against it.

Let history be the final arbiter in this ongoing 'debate', but let's not start goading people who pick a side because they refuse to enter the lion's den to stand on their own ideology?

I have to agree that the Stoupas couple are the real winners here. They got all that money for four old houses, with only one ending up sold at the auction. That's quite the lucky - if not also smart - move.

This just uncovered for most of us the truth that real estate prices are only as good as how much people will be paying for them, and not by how much owners would like to sell them. They forgot the law of supply and demand.

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